IMF Executive Board Concludes 2012 Article IV Consultation with Brazil

Public Information Notice (PIN) No. 12/84
July 20, 2012

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2012 Article IV Consultation with Brazil is also available.

On July 9, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Brazil.1


The past decade has seen a remarkable social transformation in Brazil, underpinned by macroeconomic stability and rising living standards. A strong policy framework (fiscal responsibility, inflation targeting and a flexible exchange rate), and improved income distribution and social outcomes have been important accomplishments. Together with terms of trade gains and economic and financial inclusion, this has supported sizable gains in private consumption and some increase in investment. Financial stability has been underpinned by a strong banking system and framework for regulation and supervision.

More recently, Brazil’s economy has slowed and growth surprised on the downside last year. A policy tightening cycle was appropriately launched during 2010-11 to cool overheating pressures and bring inflation gradually back to target. Macroprudential measures were also introduced to reduce stability risks in specific sectors. Growth stalled in 2011 Q3 and slowed to 2.7 percent in 2011, in part reflecting the impact of external shocks.

Monetary policy has since been eased substantially though its effect on the real economy has taken hold more gradually than in previous cycles, while the primary surplus target for 2012 has been kept unchanged at 3.1 percent of GDP. The economy expanded only slowly in early 2012, reflecting weak investment and business confidence and slowing trade volumes. Industrial output remains sluggish. However, consumption has been recovering since late 2011 on the back of improving confidence and buoyant labor market conditions, including the large minimum wage increase.

Inflation is falling but medium term expectations have risen above the target mid-point. After peaking at over 7 percent in September 2011, annual headline inflation has dropped to 5 percent in May. This decline reflects to some extent the unwinding of transitory supply factors and the effect of the normal periodic updating of the index weights. The lagged impact of moderating growth and the negative output gap has also exerted some downward pressure.

Credit has grown very rapidly in Brazil over the last years with a substantial increase in the credit-to-GDP ratio. A significant portion of this likely reflects financial deepening. With the gains on income and inclusion post-2003, new borrowers have obtained access to finance. Legal reforms have substantially strengthened creditor rights. Moreover, the overall level of financial development remains low by international standards, a factor that lowers stability risks. More recently, credit growth has moderated in line with the economy, reducing the risks of overheating in some sectors, while the large buffers in the system limit stability risks.

Capital flows have slowed in recent months. Portfolio flows remain very modest, in part due to the traction the authorities have achieved with various capital flow management measures, but also due to increased risk aversion in global financial markets. However, foreign direct investment inflows (FDI) are still buoyant and continue to largely fund the current account. As capital flows have moderated, the exchange rate has depreciated significantly against the U.S. dollar, although it remains above the average levels of 2004-08 in real effective terms.

Executive Board Assessment

Executive Directors commended the authorities’ commitment to a strong policy framework, which has delivered a decade of macroeconomic stability and rising living standards. Appropriately calibrating policy to changing economic conditions and increasing saving and investment will be important challenges for the period ahead.

Directors welcomed the recent reorientation of the policy mix toward generating fiscal savings and providing monetary countercyclical support. They encouraged the authorities to meet their deficit target for the year to secure a declining path for the debt ratio and further boost the credibility of their fiscal plans. Directors considered that monetary policy has been appropriately eased, but noted that the authorities should stand ready to unwind the monetary stimulus if their inflation target appears at risk.

Directors agreed that exchange rate flexibility and liquidity provision provide first lines of defense against adverse external shocks. They also noted that capital flow management measures (CFMs) have been a useful addition to the policy toolkit in a turbulent financial environment. A few Directors cautioned, however, that CFMs, while helpful in the short run, do not fully address important underlying drivers of capital inflows, could affect domestic liquidity, and may adversely impact other capital flow recipients.

Directors considered that further efforts are needed to rebalance demand from consumption to investment and net exports. They took note of the staff’s assessment that the real effective exchange rate remains on the strong side despite a significant depreciation from peak levels a year ago. Directors welcomed recent steps to strengthen saving and competitiveness, including pension and tax reforms, but saw the need for further reforms to raise productivity. Public investment financed by fiscal saving and further capital market deepening will also be important.

Directors welcomed the findings of the FSAP Update that the financial sector is well regulated and supervised and that the banking system is well-placed to cope with shocks. Nonetheless, they considered that rapid consumer credit growth, rising real estate prices, and continued credit expansion by public banks call for continued vigilance and careful prudential oversight. Directors commended the authorities’ plans to bring forward the implementation of elements of Basel III, continue to make active use of macroprudential policy tools, and further boost the soundness of the financial sector.

Table. Brazil: Basic Data, 2006-2012





    Prel. Proj.


2006 2007 2008 2009 2010 2011 2012









(Annual percentage changes, unless otherwise indicated)









Real GDP

4.0 6.1 5.2 -0.3 7.5 2.7 2.5

Domestic demand (contribution to growth, percent)

4.6 6.9 6.5 0.0 9.6 3.4 2.7

Private consumption (growth rate)

5.2 6.1 5.7 4.4 6.9 4.1 3.4

Public consumption (growth rate)

2.6 5.1 3.2 3.1 4.2 1.9 -1.7

Gross investment (growth rate)

5.8 11.4 11.3 -11.7 20.8 2.5 3.7

Gross fixed capital formation

9.8 13.9 13.6 -6.7 21.3 4.7 5.8

Foreign balance (contribution to growth, percent)

-0.7 -0.8 -1.3 -0.3 -2.0 -0.6 -0.2

Exports of GNFS (contribution to growth, percent)

0.6 0.7 0.1 -1.0 1.2 0.5 0.4

Imports of GNFS (contribution to growth, percent)

1.3 1.6 1.4 -0.7 3.2 1.1 0.6









Consumer price index (IPCA, period average)

4.2 3.6 5.7 4.9 5.0 6.6 5.2

Consumer price index (IPCA, end of period)

3.1 4.5 5.9 4.3 5.9 6.5 4.8

GDP deflator

6.1 5.9 8.3 7.2 8.2 7.0 5.6

Terms of trade

5.3 2.1 3.5 -3.2 17.0 7.8 -6.8









(In percent of GDP)









Public finances








Federal government 1/








Total revenues

23.0 23.3 23.6 22.8 24.4 23.9 23.9

Total expenditures

26.1 25.5 24.4 26.1 26.0 26.0 24.8

Of which: interest

5.3 4.5 3.6 4.6 3.3 4.4 3.1

Primary balance

2.2 2.2 2.8 1.3 1.8 2.2 2.2

Consolidated public sector








Primary balance

3.3 3.5 4.1 2.2 2.5 3.1 3.1

Overall balance

-3.5 -2.6 -1.3 -3.0 -2.7 -2.6 -1.9

Public sector net debt

47.0 45.1 38.0 41.5 39.1 36.4 34.6









(12-month percentage changes, unless otherwise indicated)









Money and credit








Base money 2/

12.6 21.8 -17.6 11.6 131.7 10.8 7.4

Broad money (M2) 3/

18.6 18.4 18.0 15.8 15.4 18.7 15.5

Credit to the private sector

21.8 28.9 28.3 13.3 22.9 20.2 18.1









(In billions of U.S. dollars, unless otherwise indicated)









Balance of payments








Current account

13.6 1.6 -28.2 -24.3 -47.3 -52.5 -63.4

Merchandise trade balance

46.5 40.0 24.8 25.3 20.1 29.8 9.9


137.8 160.6 197.9 153.0 201.9 256.0 260.0


-91.4 -120.6 -173.1 -127.7 -181.8 -226.2 -250.1

Services, income, and transfers (net)

-32.8 -38.5 -53.0 -49.6 -67.4 -82.3 -73.3

Capital and financial account

16.3 89.1 29.3 71.3 99.6 109.4 91.7

Foreign direct investment

-9.4 27.5 24.6 36.0 36.9 76.0 55.6

Portfolio investment

4.3 37.9 3.5 50.5 56.4 31.2 14.4

Other capital (net)

21.3 23.7 1.3 -15.2 6.3 2.2 21.7

Errors and omissions

0.6 -3.2 1.8 -0.3 -3.5 -1.3 0.0

Change in net international reserves

-4.3 -30.6 -87.5 -3.0 -46.7 -48.8 -55.7

Current account (in percent of GDP)

1.3 0.1 -1.7 -1.5 -2.3 -2.1 -2.3

Outstanding external debt (in percent of GDP)

0.0 0.0 12.0 12.2 12.0 12.0 12.7

Total debt service ratio (in percent of exports of goods & services)

51.8 51.5 28.6 40.4 29.9 26.4 21.0

Gross reserves/short-term external debt (residual maturity, in percent)

425.1 463.6 531.4 769.7 503.6 887.5 394.6

Sources: Central Bank of Brazil; Ministry of Finance; and IMF staff estimates.

1/ Includes the central government, central bank, and social security system.

2/ End of period. Currency issued plus required and free reserves on demand deposits held at the central bank.

3/ End of period. Currency in circulation plus demand, time and savings deposits.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


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